Principles of Managerial Finance

CHAPTER 5 Risk and Return 237

TABLE 5.10 Selected Beta Coefficients and

Their Interpretations

Beta Comment Interpretation

2.0 Move in same Twice as responsive as the market

1.0 direction as Same response as the market

.5 market Only half as responsive as the market

0 Unaffected by market movement

.5 Move in opposite Only half as responsive as the market

1.0 direction to Same response as the market

2.0 market Twice as responsive as the market

TABLE 5.11 Beta Coefficients for Selected Stocks

(March 8, 2002)

Stock Beta Stock Beta

Amazon.com 1.95 Int’l Business Machines 1.05

Anheuser-Busch .60 Merrill Lynch & Co. 1.85

Bank One Corp. 1.25 Microsoft 1.20

Daimler Chrysler AG 1.25 NIKE, Inc. .90

Disney 1.05 PepsiCo, Inc. .70

eBay 2.20 Qualcomm 1.30

Exxon Mobil Corp. .80 Sempra Energy .60

Gap (The), Inc. 1.60 Wal-Mart Stores 1.15

General Electric 1.30 Xerox 1.25

Intel 1.30 Yahoo! Inc. 2.00

Source: Value Line Investment Survey(New York: Value Line Publishing, March 8, 2002).

Hint Mutual fund
managers are key users of the
portfolio beta and return
concepts. They are continually
evaluating what would happen
to the fund’s beta and return if
the securities of a particular
firm were added to or deleted
from the fund’s portfolio.

the portfolio’s total dollar value represented by asset j,and letting bjequal the

beta of asset j,we can use Equation 5.7 to find the portfolio beta, bp:

bp(w 1 b 1 )(w 2 b 2 ).. .(wnbn)

n

j 1

wjbj (5.7)

Of course, nj=1wj1, which means that 100 percent of the portfolio’s assets

must be included in this computation.

Portfolio betas are interpreted in the same way as the betas of individual

assets. They indicate the degree of responsiveness of the portfolio’sreturn to

changes in the market return. For example, when the market return increases by

10 percent, a portfolio with a beta of .75 will experience a 7.5 percent increase in

its return (.75 10%); a portfolio with a beta of 1.25 will experience a 12.5 per-

cent increase in its return (1.25 10%). Clearly, a portfolio containing mostly

low-beta assets will have a low beta, and one containing mostly high-beta assets

will have a high beta.